I’m actively reviewing more than three dozen submissions as a member of the Willamette Angel Conference. I participate in the investment, and I get one vote. Our group is reviewing companies and will award a six-figure investment at an event held May 13 in Eugene, Oregon, my home town.
Our behind-the-scenes process to review companies, and particularly our discussions, are confidential. So this post is my opinion only, not to be taken as expression of the angel group.
However, as the reviewing process begins, I’m happy to share my personal views, the kind of things I look for in a company. Although there are always exceptions, and I do everything case by case, what gets my vote?
1. Likelihood of exit
Without going into detail here, our deal terms lean toward companies that will be getting a larger investment from professional venture capital within a year or so. So it isn’t about choosing the best opportunity for the founders, as you might think. Companies that aren’t aiming for that next round of investment are less attractive. Companies that aren’t likely to generate liquidity for investors within three to five years are much less likely.
This rules out a lot of good business. My own business, for example, Palo Alto Software, wouldn’t have met this condition back in the beginning when it might have been able to absorb angel investment. Strong, healthy service companies don’t generally meet this condition.
2. Management experienced in startups
This is about reducing risk. Of course it’s true that some people succeed on their first try, but in general, if the founders and/or some strong leaders on the management team have been through the startup grinder before, they’re better prepared to get through it again.
This starts out as what we see as written background: past experience, education, etc. It becomes the real person after we meet the real people. What shows up in writing doesn’t always show up in person. Sometimes experience is modified by personal traits, charisma, lack of it, confidence, balance, participation in discussions, etc.
3. Product/market fit and prospects
I borrowed this term from Marc Andreessen, which I summarized a couple of years ago now in Market Fit is Critical. This is all about a business that can grow fast. Normally that means product or productized service (like a Web app) that can scale. In the classic product business, once you have the bugs out it can sell 10, 100, 1,000 or 10,000 units a day just by scaling up production. That takes a good product with some real benefits to a real market.
I don’t mind a beachhead strategy, focusing on a specific and narrower market segment first, to gain strength and momentum, if there is a larger market in the future.
This is where a lot of great service businesses become less attractive to investors. Does it take doubling head count to double sales? That’s hard to grow with. Is the value of the company based on the knowledge and expertise of the professionals providing the service? That’s hard to scale.
4. Everything else
I don’t want to pretend that it’s as simple as this 1-2-3 list. A lot comes up that I’m not including here because it just clouds the issue. For example, our group has an explicit bias for Oregon companies, and especially companies from the Southern Willamette Valley. Our group tends to like high-tech more than low-tech, and we’re slightly skewed toward some agricultural and clean technology. But in the end, everything ends up being considered on a case-by-case basis. It’s not about a set of rules or criteria; it’s about getting the best investment.